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Energy: WTI crude oil prices close above USD 100 for the first time |
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22.02.08 20:18 |
| | | Energy: WTI crude oil prices close above USD 100 for the first time
Energy prices soared this week, with WTI crude oil prices on Tuesday closing for the first time above USD 100. Speculation that OPEC will decide to curb production at its next meeting, ongoing concerns over the dispute between Venezuelan President Chavez and Exxon Mobile and intensified tensions in the Niger delta region have all contributed to the latest rally in crude oil prices. In the market, strong fund buying and short covering were also mentioned as reasons for the latest upsurge.
Commodities have caught investors’ and funds’ attention as they are seeking a hedge against inflation and a safe haven to hide from the sub-prime debacle. After closing above USD 100, crude oil prices came back down a bit. WTI and Brent prices currently stand around USD 98 and 97, respectively.
Gasoline prices have proved to be strong as well. An explosion that occurred at Alon Big Spring refinery in Texas provided support for higher product prices. This has boosted refinery margins, as the spread between crude oil and gasoline prices has increased considerably. Gasoline prices are currently trading around USD 2.52 and heating oil around USD 2.75 per gallon. US natural gas prices were supported by colder weather in the Midwest and Northeast as well as multiple outages at coal plants, which tend to result in more gasfired generation. Natural gas prices are currently slightly below USD 8.85.
While crude oil prices have spiked to USD 100, we do not think that this is a fundamentally justified price level. The market situation has clearly become less tight since the last time the oil price touched USD 100 on 2 January. Currently, there are four main reasons why we do not expect crude oil prices to climb further: 1) enhanced crude oil production in OPEC and non-OPEC countries, 2) increasing US crude oil inventories, 3) a global economic slowdown and, last but not least, 4) seasonality.
As we already pointed out in the last editions of the Research Weekly Commodities, non-OPEC and OPEC production has been increasing over the past few months. This enhanced production saw crude oil inventories in the USA increase. Stocks have rebounded sharply during the past six weeks and are now almost 7 million barrels above average levels. Since we expect crude oil production from non-OPEC countries to further expand in the first half of this year, the trend for higher US crude oil inventories should continue for some time.
The economic slowdown and high prices have already had an impact on crude oil demand in the USA. The latest data indicate that, in the USA, implied petroleum demand has weakened by more than 4% YoY. The combination of high crude oil prices and, as our economists expect, a stagnating US economy, should further dampen demand for petroleum. Moreover, crude oil demand should also lower due to the seasonal weak demand in the second Quarter.
Collectively, these four factors, which point toward increasing supply and a slowdown in demand, should, in our view, bring crude oil prices under pressure. However, since volatility in the crude oil market has been on the rise since October last year and is now on elevated levels, it is not unusual to see large price swings, which at times may exceed or undershoot our forecast levels. Consequently, investors in the crude oil market must be aware of the high risks that currently prevail in the market.
source: CS
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